Educational Articles

Lower Fees: Priceless

Sharif Abdou
| May 14, 2010

Shares of credit and debit card payment processors MasterCard (MA) and Visa (V) traded down following a U.S. Senate vote to place limits on debit card fees paid by businesses to card issuers. The Senate amendment, which is part of a broader Wall Street reform bill, would reduce the fees paid by businesses whenever a customer uses a debit card. The proposed amendment would give oversight of interchange fees to the Federal Reserve. In the recent past, there have been allegations, and even lawsuits, levied against both companies, claiming merchants have been overcharged despite reduced costs on the processing end. The bill would also give merchants more power to limit consumer use to specific cards and minimum purchases.

This could be somewhat problematic for MasterCard and Visa for several reasons. First, debit payments now account for a much larger share of transaction volume, since consumers tend to prefer their debit cards for smaller day-to-day items. Too, the amendment, should it become law, would limit payment processors' ability to set prices and interchange fees and further complicate negotiations with delinquent customers.

To be sure, the long-term outlook for both MasterCard and Visa is promising, owing to their ubiquitous brand names, growing international presence, and clean balance sheets. Moreover, the decades-long secular shift to electronic payments (in lieu of cash) shows no signs of slowing. However, the pending legislation could place some moderate pressure on results in the near term